• BUY and SGD1.65 TP, 12% upside, and 5% FY24F yield. The Public Transport Council (PTC) has announced a 6% fare increase effective 28 Dec – in line with our estimate. We expect ComfortDelGro’s Singapore rail business, which operates under SBS Transit Rail (SBSR), to report a small profit in 2024. The announced fare hike and moderation in operating costs towards the end of 2024 should translate into SBSR reporting better profits in 2025. We keep our estimates unchanged and reiterate that CD should continue to report earnings improvement in 2H24 and 2025.

• Fare adjustment. The 2024 Fare Review Exercise (FRE) translated into a fare adjustment of 3.3%. After adding the deferred fare quantum of 15.6%, the maximum allowable fare adjustment quantum for the 2024 FRE comes up to 18.9%. However, to cushion commuters from sudden sharp rises in fares, the PTC decided to grant a fare increase of only 6%. This will reduce the deferred fare quantum to 12.9% for future years. To cover the difference, the Government will provide a subsidy of SGD250m (SGD300m in the previous FRE). While the fare adjustment is higher than the inflation rate, PTC noted that public transport fares remain affordable, as the monthly public transport expenditure accounted only for 2.4% of the household income for second- decile income group households in 2023.

• Impact on SBSR. PTC noted that both SBSR and SMRT Trains applied for a fare adjustment of 18.9% citing cost pressures. However, based on the announced fare adjustment, SBSR should see a revenue increase of SGD20.3m in 2025. Excluding the mandated contribution of SGD3.05m to the Public Transport Fund (15% of the expected increase in fare revenue), the net revenue increase would be SGD17.3m. Assuming no changes to the cost structure, the post-tax profit should be around SGD14.3m. CD’s portion of the earnings for its 74.41% stake in SBSR would be SGD10.65m. However, it noted that the Singapore public transport business, especially the rail business, should see a moderation in operating costs towards end 2024, as existing electricity contracts are expected to be re-contracted at lower rates. While this could boost profit contribution, we do note that, at the public transport segment level, the increase will probably offset the lower Singapore bus earnings due to the loss of a bus package.

• Maintain our investment thesis. We expect CD to deliver strong growth in 2024. This is helped by contributions from the recently completed acquisitions and improved margins for its UK public transport business, which should experience a seasonally strong 2H24. We expect the improvements seen in 2Q24 for its taxi business to continue in 2H24. Our TP includes a 6% ESG premium to CD’s SGD1.55 FV based on its 3.4 ESG score.

Source: RHB Research - 13 Sep 2024